Credit crunch sparks hike in contract hire

The credit crunch continues to take its toll on banks, the construction market and property transactions. And this global squeeze is also hitting the municipal waste market as local authorities discover that traditional financing options are drying up, forcing a move towards contract hire, according to vehicle hire company TransLinc.

TransLinc's national sales manager Mark Werrell says: "In general, we have found that local authorities are extending existing contracts and vehicles, and are not committing to new services while the economy is in the current downward spiral."
He believes traditional operating lease finance is becoming less accessible to councils as banks and lending institutions look for higher margin returns to rebuild depleted capital balances.

"We even know of instances where banks and lenders have moved out of the local government space," he points out. "Local authorities still have a need to provide and invest in waste and recycling activities. Pressure in this area continues to feed down from central government to improve recycling rates and reduce waste landfill, but councils will have to readdress their priorities in the face of tighter capital markets."

Werrell adds that the current dilemma facing local authorities is when to take the plunge on new services and vehicles. Do they wait for the market to steady out or do they act fast and buy services in this year's budget?

"We can see a situation where local authorities are forced to change their financing [habits] as traditional funding options become tighter, moving from the operating lease market and moving towards contract hire with maintenance contracts, thus removing themselves from the financial risk associated with fleet ownership."

Opportunity knocksTransLinc sees the continued economic downturn as an opportunity to offer clients a competitively priced facility for contract hire and sale and lease-back solutions after the recent increase in its borrowing facility at pre-credit crunch rates.

Another vehicle hire company, equally as optimistic, is Harprule - one of the largest independent municipal vehicle hire companies in the UK, based at Tuxford near Newark, Nottinghamshire. Operations manager Matt Townsend says the company has experienced a small downturn, but is confident about the future. The company has invested in new trucks this year and has a good customer base.

"Councils do hire if they need it," says Townsend. "They are facing the same costs as everybody else in terms of fuel, so they are only taking what they need." He adds that the spot hire market is a bit "hit and miss" with demand high one week then "flat as a pancake" the next. During the recent strikes, some councils took on extra vehicles and have kept them on. But Townsend is wary of blaming everything on the credit crunch. "It's a bit of a grey area - everybody jumps on the credit crunch, but I'm not so sure."

In the future, Townsend believes that councils will look to control their costs through contract hire rather than purchasing vehicles outright. "It means that councils can fix their vehicle costs for the next five or seven years so that instead of buying 20 or 30 dustcarts outright they can get a company to run the fleet for a few years."

In it for the long termNeil Jeremiah, sales director at Gulliver's Truck Hire, says that the company's general hire section such as vans and tractor units has seen a slowdown in business, but the local authority waste management sector seems to be holding up. The main reason, he feels, is that around 80% of its municipal hire business is long term.

"We are therefore not affected by what is happening in the spot hire market," he explains. "It might be that customers are feeling it [the credit crunch], but they have three, six or 12-month contracts."

However he does point out that the one thing that has come under pressure over the past 12 months is rates in the refuse collection sector. A lot of smaller businesses have entered the market and as a consequence there is now oversupply of vehicles and a resultant downward pressure on rates. "Generally though we are not seeing too much that is giving us any cause for concern," he adds.

Liverpool-based hire firm Easirent has been thinking about lessening its dependency on the spot hire municipal vehicle market, which is very "erratic" in the current climate, according to operations manager Colin McMorine. The company is considering offering more contract hire to combat this. On some days there might be several vehicles standing around without work, while other days there are not enough vehicles to go around, McMorine points out.

Easirent is currently achieving utilisation rates of around 80% although this dipped in May to around 70%, says McMorine. As for general market conditions, McMorine says he was told by the hire desk of a very large UK waste management company that the firm "had never known it this quiet" in the past six or seven years.

But while hire firms are among the first affected if there is a downturn, they are also the first to benefit from an eventual upturn, McMorine adds. "Com-panies might be nervous about spending £100,000 on a new vehicle at the end of a recession so they tend to hire instead."

Andy Collett, director of Collett Transport Services, believes the credit crunch has meant some companies are taking much longer than 30 days to pay their bills. And this late payment situation is having a negative impact on the company's cash flow.

"We are getting hit quite hard by companies which are running contracts for councils - they are slowing up on payment," he says. "In fact, one company which provides ten kerbside vehicles for a council hasn't paid us since March - that's around £70,000."

Collett adds that the company wants to buy extra vehicles and repaint existing ones, but is being slowed down by the delay in payment. "It's frustrating," he says, adding that another knock-on effect of the credit crunch is that his company is now carrying out tighter credit checks.

"This is particularly important with small start-up companies. We check out the directors and the credit history. If firms don't meet the criteria, we won't do business with them."

Squeeze on budgetsHe also feels that as council budgets get squeezed, more thought is going into hiring in the first instance. "Councils are thinking 'do we really need it?' whereas it has been more relaxed in the past." Despite this, business for Collett is growing and turnover has increased.

"As well as municipal hire, we do general haulage. Our customer base is getting bigger. Although individual councils might be using us less, we are finding that more councils are using us as we become more well known." As LAWR went to press, Collett was poised to supply five vehicles for Veolia in Kingston upon Thames, Surrey.

Meanwhile, Linktip - a specialist bodybuilder that supplies many refuse and recycling vehicles to hire firms - is experiencing growth. Sales director John Prescott says that the company has recently received some "good orders" from specialist hire companies which supply local government.

"We have seen growth," maintains Prescott, "obviously we always want more, but we haven't seen a downturn."